Thursday, July 9, 2009

An Uncertain Road for IOU Recipients

For lack of a budget revision in place, our State Controller will issue more than $3 billion of IOUs this month. But after tomorrow the nation’s largest banks – including Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase – will cease accepting them as legal tender.

So, what are IOU recipients to do? That is not entirely clear.

Generally, the options are limited and mixed:
• Identify alternative banks or credit unions to cash their IOUs, which the institutions will redeem upon maturity on October 2;
• Sell their IOUs to third parties with a notarized bill of sale, which the buyers can redeem on October 2; or
• Redeem their IOUs with the State Treasurer on October 2.

Earlier this week, the Treasurer published guidelines for redeeming or selling IOUs. He also established a toll-free IOU help line at 1-888-864-2762.

But just yesterday the Securities and Exchange Commission claimed California's IOUs fall under federal securities law. Among other things, it stated “Persons acting as intermediaries between buyers and sellers of the warrants may need to register as brokers, dealers or municipal securities dealers, or as alternative trading systems or national securities exchanges.”

Clearly the recipients of IOUs and prospective buyers need to be careful on the road ahead. Let’s hope that it becomes clear for the benefit of all through this challenging time.